“When I told my doctor that I couldn’t afford the operation, he offered to touch up my X-rays." This sort of sums up the thrust of the government-appointed Sunil Mehta committee report for yet another structured solution to the non-performing assets (NPAs) plague afflicting our economy. The “operation" here is the National Company Law Tribunal (NCLT) route under the Insolvency and Bankruptcy Code (IBC), under which a very low percentage of recoveries andliquidation rather than resolution have been preponderant so far. Project Sashakt aims to minimize the pain.

In FY18, public sector banks’ losses aggregated over ₹ 85,000 crore and gross NPAs saw an almost 50% increase to reach close to ₹ 9 trillion. Sensing this in its asset quality reviews (AQRs), the Reserve Bank of India (RBI) coerced all banks in June 2017 to move the insolvency courts to resolve their bad loans, and, early this year, dismantled all loan restructuring platforms, such as strategic debt restructuring and the scheme for sustainable structuring of stressed assets, unambiguously leaving the NCLT route as the sole resolution vehicle.

Briefly, Sashakt aims to bolster the lending performance of banks through structured and time-bound resolution of stressed assets below ₹ 50 crore within 90 days and those in the range of ₹ 50-500 crore within 180 days.

Of course, the thrust of the report is on stressed assets exceeding ₹ 500 crore, where resolution is proposed through an “independent" asset management company (AMC). The AMC would be set up by state-run banks and could also have within itself an Alternative Investment Fund (AIF) raised from institutional investors. This AMC’s functioning, it is stated, will be aligned to the IBC. At the heart of this prescription is a “voluntary" inter-creditor agreement (ICA) between banks where a binding resolution plan can be worked out by the lead bank once 66% of the lenders agree on it.

The anxiety of the government in addressing its twin objectives of minimal equity infusion in public sector banks alongside loan restructuring as a means of resolution is understandable. According to ICRA, the likely debt haircut in power sector assets could average 40%, ranging from 20% to 70%. The AMC route could postpone this, but the problem, as experience shows, could return in an aggravated form. So far, the bankruptcy process is forcing banks to book massive losses, with most accounts headed for liquidation. In many cases, the recoveries are even below the liquidation value. The government hopes that Sashakt will help significantly reduce this haircut.

There are several serious issues that have emerged with this initiative and need to be ironed out ab initio. The straitjacketed resolution within 90 days of loans up to ₹ 50 crore and within 180 days for loans exceeding this amount up to ₹ 500 crore runs contrary to recent stringent RBI directives on NPA recognition and is seen as a means of postponing the inevitable. Also, the scheme betrays a lack of appreciation of the complexities of the small and medium enterprises sector in India.

As regards the larger exposures, the power sector seems to be the major unstated focus of Project Sashakt. This sector has ₹ 3.6 trillion of stressed assets. Out of 220 gigawatts (GW) of installed thermal power capacity, almost 70GW is under stress for several reasons like non-availability of power purchase agreements from cash-starved state-owned utilities, coal shortage and lack of investment in the transmission grid to ease offtake. How the proposed services of “sector experts" under the AMC will address these issues, and where banks will find the huge resources to invest in the AMC, are multibillion-dollar questions. Also, in the current business climate, banks may baulk at taking any “discretionary" decisions outside the IBC.

In February 2018, the RBI provided a 180-day window of relief to banks that were already attempting resolution of large stressed accounts under its schemes. Any failure therein would have to perforce be directed to the IBC route. This deadline is coming up in late August 2018 and the RBI is not willing to consider any further relaxation despite representations from various industry associations and court cases. The above-mentioned power projects form a major part of these banks’ exposures and most likely will go the NCLT way.

More fundamentally, Sashakt does not seem to yet have the nod of the banking regulator—the RBI. Considering that it runs contrary to the stance of RBI in a number of areas, the implementation challenge remains. Perhaps this has prompted a top banker to recently opine that adoption of Project Sashakt by banks is “voluntary".

Coming back to the doctor-patient analogy, I am reminded of the words of Hippocrates. “Whenever a doctor cannot do good, he must be kept from doing harm." It may be better if the government restricts itself to addressing the external causes of financial stress which are in the state domain rather than stepping on to the RBI’s legitimate turf. The IBC is still young and yet to mature. The interest of global entities in getting into emerging opportunities from distressed assets will surely be there in times to come once the code stabilizes and the legal challenges of defaulting promoters gradually peter out. We need to be optimistic on the IBC rather than seeking non-legal solutions all over again.

Ashwini Mehra is former deputy managing director, State Bank of India.